Efficient Horizontal Mergers: The Effects of Internal Capital Reallocation and Organizational Form

32 Pages Posted: 25 Apr 2006 Last revised: 1 Oct 2008

Abstract

This paper analyzes the resource reallocation problem in merged firms when the merged firms have a choice to retain competition between the merging partners. We consider horizontal mergers between firms that differ only in their initial capital levels. When initial capital levels are unequal, evenly distributing total capital between merging partners improves the overall cost efficiency of the merged firm. In this case, the merger often results in the multidivisional structure (the M-form) rather than the conventional structure of completely integrating merging partners because, under the M-form, the profits from aggressive production expansion backed by efficiency-improving capital reallocation is higher than the profits from output contraction and rationalization under complete integration. Such a merger enhances market competition. On the contrary, mergers between identical firms always induce complete integration.

Keywords: The M-form, capital reallocation, horizontal mergers

JEL Classification: L41, L13, L21

Suggested Citation

Mialon, Sue H., Efficient Horizontal Mergers: The Effects of Internal Capital Reallocation and Organizational Form. International Journal of Industrial Organization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=898658 or http://dx.doi.org/10.2139/ssrn.898658

Sue H. Mialon (Contact Author)

Emory University ( email )

Department of Economics
1602 Fishburne Dr.
Atlanta, GA 30322
United States
404-712-8169 (Phone)

HOME PAGE: http://www.suemialon.net